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  • Writer's pictureJohn Q Leonard

Creative New Payment Models for High Priced Drugs


There has been much recent debate around the high price of Sovaldi, Gilead's effective cure for Hep C. Some argue that payers and providers will not be able to afford the crippling healthcare costs in the short term, while others argue that the drug will save much greater costs in the long term. Thus, we have one side concerned more about short-term cash flow, while the other is more concerned about long-term cost savings and value creation. Both are important, but how to bridge this gap? One obvious possibility (which I have not seen discussed anywhere) would be for the pharma companies that have developed such breakthrough drugs to finance payers and providers with a long-term loan to ease their short-term cash flow burden, while recovering fair value (with some moderate interest) in the long term. Thus all stakeholders (payers, providers, doctors, patients, pharma companies and their investors) can survive in the short term and also prosper in the long term. Would this model be viable, and has anyone seen it tried anywhere?

Could drug companies float "loans" to payors.providers? Would their investors approve of this utility? Would interest be charged on top? And if Hep C is cured and patient now not requiring additional support, what adjustments will the healthcare sector make to now not continually treating patients?

Value from the drug is realized by the absence of the disease's effects and their associated costs over many years. Why not align the time horizon of financing with the time horizon of this value realization, and then all parties can maximize their combined returns?

It boils down to a "time value of money" or "net present value" proposition, for providers/payers as well as the drug company. The patient receives immediate value--a cure--while drug companies defer their income and providers/payers defer their costs. At some price point, or a different price-point-plus-interest, this would work. Many providers/payers, especially governments, have fixed or hard-to-change budgets and adding a costly new treatment to their formulary can to some extent be a zero-sum game: if we now pay a huge amount for THIS, we have to cut back on THAT. However this approach still doesn't confront the fundamental issue of high costs, it merely kicks them down the road.

So what we are suggesting is this: A uniform deal/price to payers/providers, but with the added OPTION of loan financing by Pharma companies (which payers or providers are not obliged to accept). Wouldn’t this added option create more flexibility and therefore value?

Isn't this exactly what auto companies do, offering loan financing to buy their cars, so that it is more affordable to more customers, by easing pure cash flow issues? The car example is provocative. If you fail to pay, I can repossess your car. What if the payor fails to pay - do we reinject the patient with Hep C virus and tell them sorry?

One could also ask: show me the cost to develop that drug and what it will cost for you to produce it, and provide a fair return to the company. Remember that the price and business decisions are not set on being Mr. Nice Guy to the patient or physician practice; it is set by those with stock options, those who are shareholders, those with heavy investment. For example, Azmacort was a $20 million/first year sales drug that went on to produce billions. Reopro was a Centocor drug that produced $13 million first year, now a $4.4 billion product in J&J's portfolio. Today, it takes $350 million to even get budget to develop a product. And as Tufts announced, the actual cost to develop a NCE is nearer to $2.5 billion than the $1 billion promoted for years. GSK moves 450 people to Parexel to get them off the books, AZ sells a compound for $200 million to a biotech, GSK moves Oncology division to Novartis. Why? The industry needs to learn how to play small ball, and produce drugs that can be both profitable and affordable - the days of blockbusters are gone and, when few new products being produced, the end result are products like those that cure Hep C (with a cost). Don't forget the wave of low cost generics now hitting the market, which adds to the healthcare coffers as well.

Drugs need to be cheaper, and the only way we can deliver better new drugs at lower cost is to develop them at lower cost, so that Pharma can still make a decent return, like in the old days. Back to the R&D productivity issue-- Solve the R&D productivity issue, and all the other issues will be solved automatically. Everyone can win if better new drugs were cheaper to develop, because there would be more value created to share with all other stakeholders. Or to put it simply, pharma's business model is broken because it depends on productive R&D, but R&D itself is broken.

I think the analogy to buying a car (or even a house) is a good one. Bundle a time-payment plan with an expensive purchase. If they want to buy it, but short-term cash flow is the problem, this may be a sensible fix. For individual patients, you would have to think carefully about default risk. But for a large payer that problem might not be so bad.

Dispite my argument that this signals a threat to Pharma companies, valuations are always ultimately determined by demand. If Sovaldi and Gilead felt that they won't be able to sell their product at their projected price, they would have reduced that projected cost to consumers. The fact is that there is sufficient demand for their product and sufficient number of willing payers for their product. If government steps in to determine valuations of therapeutics, the entire Pharma industry is doomed.

In addition to the Pharma financing models, these are three additional alternative pricing models for expensive drugs.

· Payment by Use, in which different prices are paid for drugs depending on the specific indication. This is particularly relevant for new cancer drugs and biologics for which there can be a four- to five- fold difference in the economic value of a single drug, depending on what it is used to treat. With big data, providers can now capture actual use by indication, and multiple reimbursement levels can be set and applied accordingly.

· Outcomes-based Payment, where payment levels for particular drugs are based on the total savings resulting from their use. This approach is especially important for personalized medicines, where drugs not only bring the benefit to the patient but also yield savings to the health system through avoiding use of drugs by non-responders. Big data analysis can be leveraged by payers and providers to measure efficacy, and serve as the basis for negotiating drug prices with manufacturers.

· Conditional Approval/Conditional Pricing, in which conditional regulatory approval is accompanied by conditional pricing for medicines prior to full information of a drug’s value being determined – an approach that can help with the pricing of urgently needed new medicines. Big data can enable the monitoring and assessment of drugs launched with conditional regulatory approval, measuring and tracking de-identified patient use, outcomes and treatment costs in real time.


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